Thursday, February 17, 2011

Wall Street Running Amok

By Jay Franklin

For those who entrust their life savings to the titans of Wall Street, the stories that have emerged in the past few weeks should give some pause. First, we have Merrill Lynch paying $10 million to settle claims that it misused information related to client trade orders. In an interesting twist on the usual story of front-running, Merrill used the information on large client trades to place their own trades afterwards. For example, if the high net worth client sold 100,000 shares of IBM (and thus driven the price down), Merrill would have bought some shares (at the discounted price) after the client’s trade had been completed. The SEC took a dim view of this activity and required Merrill to cough up some bucks which Merrill was only too happy to do since it was, at best, a fraction of the profits they made during the four years of this egregious activity. For the past decade, IFA has ceaselessly pointed out the inherent conflicts of interest that arise when a brokerage firm places trades for its clients and simultaneously trades for its own account. The SEC’s recent recommendation of placing brokers under a fiduciary standard was long overdue.

Next up in our Rogue’s Gallery is the Bank of New York, which overcharged Virginia pension plans by at least $20 million through fraudulent currency trades. Specifically, whenever the pension fund needed to convert a currency to conduct a foreign transaction, BNY consistently gave them the worst price of the day and pocketed the difference. Of course, the hapless bureaucrats in Virginia could not be troubled to check the execution of their currency trades. The whistleblower was a small currency trading firm, FX Analytics. Interestingly, nobody is asking the broader question of why it should even be necessary for a state pension fund to transact in foreign markets where they are so clearly vulnerable. BNY is also charged with defrauding a Florida state pension plan, and in California, similar charges are being pursued against State Street. These cases belie the often-made claim that the dark side of Wall Street is purely on the retail end while everything is hunky dory on the institutional side.

Completing our round-up is J.P. Morgan who got into bed with the Ponzi King Bernie Madoff and woke up about half a billion dollars richer. Quite an accomplishment! Fortunately for them, they smelled a rat before the scheme imploded. Unfortunately, however, they did not have the decency to tell anyone else other than Britain’s Serious Organized Crime Agency which sat on it. Apparently, a potential $50 billion fraud was not quite serious enough to warrant further investigation. The filed report said the performance of Mr. Madoff’s investments appeared to be “too good to be true—meaning that it probably is.” When the house of Morgan pulled out $276 million it had invested in the Madoff feeder funds, it asked those funds to keep the move quiet, no doubt motivated by the hefty fees collected from the “sophisticated investors” they had directed towards those funds.

Please try to stay clear of Wall Street. If you need help in identifying a successful wealth management plan so that you can meet your goals, please, do not hesitate to contact Arianna Capital.

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